Crypto Gains or Crypto Pains? Understanding HMRC’s Crypto Tax Rules

Introduction: The Rise of Crypto and the Tax Confusion

Cryptocurrency has surged in popularity over the past decade, evolving from a niche digital asset into a mainstream investment. Whether you're trading Bitcoin, staking Ethereum, or flipping NFTs, the lure of crypto profits is undeniable. But with great gains come great responsibilities - especially when it comes to taxation.

An FCA study in 2024 found 7m UK adults are holding crypto. Despite this, many investors and businesses are unclear about their tax obligations regarding crypto assets. Unlike traditional investments, cryptocurrencies are often decentralised and traded on international platforms, leading to confusion over what needs to be reported and how income and gains are taxed.

If you've been wondering how HMRC views cryptocurrency, what taxes apply, and how you can optimise your tax position while staying compliant, this guide will break it all down for you.

How HMRC Views Crypto: Income vs Capital Gains Tax

Is Crypto Considered Currency in the UK?

Despite its name, cryptocurrency is not considered legal tender in the UK. Instead, HMRC classifies it as an asset, which means that usually it falls under capital gains tax (CGT) rules when sold for a profit. However, in some cases, crypto transactions may be treated as income, subject to income tax and possibly also national insurance.

Capital Gains Tax (CGT) on Crypto Transactions

Most individual crypto investors will be liable for capital gains tax when they dispose of their crypto assets. The following actions are considered a "disposal" by HMRC:

• Selling cryptocurrency for fiat (ie GBP or USD)
• Swapping one cryptocurrency for another 
• Using crypto to purchase goods or services (including transaction fees)
• Gifting crypto 
• Entering and exiting some DeFi-type positions (like staking, liquidity pools, collateralised loans) – where beneficial ownership is lost

If your net capital gains (after deducting losses in the year) exceed the £3,000 tax-free allowance (2025/26 tax year), you will be taxed at either 18% (basic rate taxpayers) or 24% (higher rate taxpayers) on the excess amount.

Income Tax on Crypto Transactions

Certain crypto-related activities are classified as income rather than capital gains. This means you could be subject to income tax at rates of 20%, 40%, or 45% depending on your tax band. 

Common scenarios where crypto may be subject to income tax include:

• Mining rewards 
• Staking rewards

Common scenarios where crypto may be subject to income tax and national insurance include:

• Employment paid in crypto
• Self employed consultancy work paid in crypto
• Trading in crypto - in exceptional circumstances, the buying and selling of crypto could be treated as a trading (business) activity. Traders in crypto are subject to both income tax and national insurance on the profits, instead of CGT. The Recap Tax Guide includes a detailed section on this topic, authored by our Head of Crypto, Louise Lane.

Understanding whether your crypto activities fall under CGT or income tax is crucial to avoid unexpected tax liabilities.

Key Tax Obligations: Reporting, Record-Keeping & Penalties

Reporting Crypto Taxes to HMRC

Crypto investors and businesses must declare their crypto income and gains above the annual limits to HMRC by filing a Self-Assessment tax return. If you have crypto-related income, it must be reported just like salary or rental income. Similarly, capital gains need to be reported in the new boxes on the tax return specifically for cryptoassets. 

Any capital losses need to be claimed, so you can use them against future gains.

Importance of Accurate Record-Keeping

HMRC requires detailed records of all historic crypto transactions to be retained by clients, in case they are requested in an HMRC Investigation, including:

• Date of transaction
• Type of cryptoasset (e.g. Bitcoin, Ethereum)
• Value in GBP at the time of transaction
• Amount of cryptocurrency involved
• Bank statements & wallet addresses

Using crypto tax software can help automate record-keeping, save time, optimise taxes and ensure HMRC compliance. Wright Vigar work in partnership with Recap to help investors comply with the tax obligations of crypto. 

Penalties for Non-Compliance

Failure to report crypto taxes can result in serious penalties, including fines and interest charges. If HMRC finds deliberate tax evasion, criminal charges could follow. Ensuring your tax affairs are in order is the best way to avoid unwanted trouble.

HMRC are now increasing their compliance activity and are actively contacting individuals they believe may have traded cryptoassets. There is a new box for cryptoassets on the tax return and from 1 January 2026, many countries around the world will report your crypto activity directly to HMRC. If you are contacted by HMRC before you have notified them that you are intending to make a voluntary disclosure, you will be liable to prompted disclosure penalties. This is at least 15% higher than the penalties applicable for disclosing unpaid tax without HMRC’s prompt.

In light of this, it is now even more important to voluntarily bring your tax affairs for prior years up to date, before HMRC come to you. 

Tax-Efficient Crypto Investing: Strategies to Reduce Tax Burdens Legally

1. Utilising the Capital Gains Tax Allowance

Each individual has a CGT-free allowance of £3,000 (2025/26 tax year). Strategically selling crypto in tranches over multiple tax years can help you stay within this limit and reduce your overall tax burden.

2. Tax-Free Gifting to Spouses

Transfers between spouses and civil partners are tax-free, allowing both in the couple to use your tax free allowances and any unused basic rate of tax. 

3. Offsetting Capital Losses

If you've made a capital loss on crypto investments, it is offset against your capital gains in the same tax year to reduce taxable gains. Unused losses are carried forward to future tax years, as long as they are claimed within 4 years of the tax year end. With careful planning, you can intentionally realise losses by triggering disposals of crypto or NFTs standing at a tax loss, or by making negligible value claims.

4. Timing around low income levels
 
Splitting capital gains over two tax years, or crystallising the gains in a tax year with lower income. This can help reduce the CGT rate applied to part of the gains, if the taxable income is less than £50,270 in the tax year.

5. Transfer income yielding crypto 

If your other income is high, consider transferring income yielding crypto to your spouse (if they have a lower annual income level) or into your own Limited Company - for more details see our separate article on Cryptoasset Tax Loss Harvesting.

Common Mistakes & HMRC Red Flags: What Triggers an Investigation

1. Failing to Report Crypto Income or Gains

Some investors assume that HMRC can't track crypto transactions or that their crypto activity is not taxable. However, exchanges are increasingly required to share user data with tax authorities. HMRC published guidance is clear that crypto activity is taxable. Undeclared gains can lead to investigations and penalties.

2. Not using Crypto Tax Software

HMRC are more likely to feel reassured you have declared the correct crypto tax position if you are using UK focussed software (such as Recap.io) and attaching Crypto Income and Gains/losses Reports to your tax return which include detailed calculations for each CGT disposal. 

3. Not Declaring  Overseas Trades

If you trade on non-UK exchanges, HMRC still requires you to report your income and gains. International trading does not exempt you from UK tax laws, as UK tax residents are taxed on their worldwide income and capital gains.

4. Mixing Business and Personal Crypto Transactions

For business owners accepting crypto payments, failing to distinguish personal and business crypto transactions can lead to accounting issues and tax problems.

Stay Compliant & Optimise Your Crypto Tax Position

With HMRC tightening its stance on cryptocurrency taxation, staying informed and proactive is crucial for UK investors and businesses. Understanding whether your crypto transactions fall under capital gains tax or income tax, keeping accurate records, and using tax-efficient strategies can help you minimise your tax liability while staying fully compliant.

If you're unsure about your crypto tax obligations, seeking professional advice can prevent costly mistakes. Wright Vigar's expert tax advisors can help you navigate HMRC’s crypto tax rules and ensure your tax affairs are in order.

Contact us today to discuss your crypto tax planning strategy and avoid unnecessary headaches.